tv Bloomberg Markets Middle East Bloomberg October 21, 2017 11:30pm-12:01am EDT
♪ nejra: etf's on a tear, the blackrock ceo seeing huge inflows in part because of mifid 2. >> we look at it as a net positive. mifid ii is creating more transparency. we need more transparency. >> by unbundling the commission? >> correct. nejra: bitcoin -- boom or bust? we discuss the future of cryptocurrencies and if regulators can work fast enough to effectively role in the
-- rule in the changing market place. beyond mifid ii, after it goes into place, what does the buy side have to fear and look forward to? welcome to "bloomberg markets: rules & returns." i am nejra cehic in london. rules and returns is a show where we delve into the regulatory challenges and opportunities for financial markets around the globe. we will talk to the top newsmakers, regulators, and market shaping the rules. passive investments are getting another boost in europe. is excited to increase investors from the u.s.. it will enable retirement savers and insurers to raise their exposure to etfs. .o speak is stephen cohen so great to have you on the program. thank you for joining us. i have brand-new, hot off the press bloomberg intelligence
research saying that you are etfs may double to $2 trillion in five years on mifid ii. let's talk about growth. is that the sort of growth you expect as a result of mifid ii? and that alone. stephen: it is. and i think that mifid ii will play a big part in it. i don't think it is just that, as you have seen in the last few years, in the u.s., a shift towards utilizing etf's by all types of investors in their portfolios. i think there are broader ships going on, but mifid ii is one of the catalysts that should accelerate it in the coming years. nejra: what is it about mifid ii that could provide a positive catalyst? is it providing more transparency? the fact that fewer etf's might be traded simply over-the-counter? stephen: you can divide it broadly as it relates to etf's in one of two camps. one impacts on investors, the other is around the trading infrastructure and ecosystem that mifid ii is going to drive.
aboutying both, a lot is transparency. if we think about retail and retail investors greater , transparency of costs is of what they're paying for is changing the portfolios they are thing about owning and the products they own within that. etf's benefit significantly. we have seen that with the fiduciary rules you mentioned in the u.s. over the last year. and then on the trading side, one thing that mifid 1 didn't do was include etf's in trade reporting. so, a lot of the trading of etfs is over-the-counter. what that means is, for some investors, they are not quite sure what is going on with etfs. even though there is volume and trading going through. so, these rules will shift to create more transparency. i think that will create more confidence in investors understanding that there is a lot of volume in these products, and therefore, they can think more broadly about how to use them. nejra: i'm wondering if with confidence comes competition? blackrock dominating the etf market in europe. you control five times the
assets of your nearest rival. do you expect more competition? does that concern you at all? and do you think it will be across all etf asset classes? stephen: it does not concern us. i think we will see more people looking at the etf market as it grows. and i think probably, what we think, anyone who was looking at the etf market can play a positive role in driving a greater adoption. ultimately, i think this is an industry where you have large players and niche players. that is what you are seeing in the u.s., and i think that is what we will it evolved to in europe. nejra: you said that even though mifid ii could be a positive boost for the etf industry but it could take a while for this to translate into something tangible. how long are you thinking it could take and why exactly? is it about the fragmentation of the european market or something else? stephen: i think when you look at the rules, there are certain rules that can have an immediate impact. there will be transparency impacts from the trading side that we will start to see in 2018, and it will excel in it -- accelerate from there.
there are other parts of the rules, particularly about retail wealth, and distribution rules that will start to kick in about transparency in 2018. i think business models will change over time. as they change, we will start to see acceleration in etf adoption. over the next two to three years, you will start to see the catalyst kicking in. nejra: and what can the industry do in order to get some of those barriers that you have outlined, so that mifid ii lives up to its transformative potential? stephen: i think a lot of it is around education. there is a lot of education that needs to be done in europe for and investors about what an etf is and the role it can play in a portfolio. the media will play an important role within that as well. in terms of helping investors think through what is going to get them a portfolio that is going to deliver the outcome they need depending on where they are in life? and the roll that etfs can play? i think they can play a very positive role. education to me is critical for
people embracing the value of the product. nejra: absolutely. and of course, the media will ask the difficult questions. at the moment, regulators aren't seeing etf's in europe as a risk. we have heard that they don't see it as a bubble at the moment. what could make the industry a victim of its own success to the point that regulators do start to be concerned apart from growth? stephen: well, i think the duty of us as etf providers is to ensure that the products that we create are suitable for investors. and i think that is something that is very much on us. i think also we have a duty to continue to educate regulators as we go through these changes, as the industry grows in the industry changes and you see the rise of new types of investing, such as factor investing through etf's, it is a way we are educating the regulators the same way we are educating clients. we have an ongoing constant and dialogue back-and-forth with
regulators to make sure they are comfortable and understand the way the industry is evolving and what we are doing to safeguard that. nejra: one final question. we have talked about the fact that the landscape is changing in europe. it is very different when you look at europe in the u.s. in terms of demand for etf's for retail versus institutional. in europe, do you see mifid ii boosting retail and retail institutional demand in equal measure? stephen: i think it will increase both. if you think about in terms of those two pieces to mifid ii, one around the distributor and transparency costs, that is very much focused on the retail and retail wealth market. i think that the trading cost transparency and trade reporting really boosts the institutional uptake. if you look at the u.s., you have seen that over the last couple of years. i think that is what we will see in europe over the next three years. nejra: ok. thank you so much, stephen cohen, head of ishares at blackrock. up next, beyond mifid ii, after
♪ nejra: welcome back to "bloomberg markets: rules & returns." now let's get a roundup of the latest news on financial regulation. here is sebastian. sebastian: morgan stanley is ready to charge $2500 an hour on new eu financial rules. people with knowledge of the plan say that will be on top of the annual rate the blank --
bank plans to hand to some clients. once the mifid ii regulations come into force. the charges almost twice the rate of top commercial lawyers. bitcoin has hit record highs rising above $5,000 for the first time ever. the sharp gains come despite criticism from the biggest names on wall street, including jamie dimon. from j.p. morgan. the cryptocurrency faces a clampdown by the people's bank of china. and that is your regulation news roundup. nejra: thanks so much, sebastian. mifid ii will keep a large part of the regulatory community busy for many months after january 3. that is according to the chairman of the european securities and markets authority. but what else should the buy side be looking for beyond mifid ii? to answer that question, shawn joins us right now, he is head of market. so great to have you on the program, welcome, thank you for joining us. you said that after mifid ii, we are done with the global financial crisis regulations,
and the shift will now be more towards policy debates. what did you mean by that? sean: mifid ii is the last big piece of regulation that came out of the great reregulation, the crisis. when we get to the other side of mifid ii the landscape changes. there are far fewer regulations that need to be implemented and the focus of policy makers will be looking at the regulatory framework, seeing what needs to be tweaked or if new rules are needed. that is really the big adjustment the buy side is facing. nejra: what policy specifically are we looking at? sean: i think one of the big ones next year globally will be the etf industry. the tremendous growth of the etf industry in the last seven to 10 years have not gone unnoticed by policymakers. i think that they will take a step back and look at the framework and see what needs to be changed, if anything. and it has already started to happen. this year, the central bank of ireland has published a paper on etf's, another one expected, the process is already being done in some ways. nejra: that is interesting because we were just talking to
stephen cohan from blackrock about how much etf's in europe have to grow from here. that there is even more potential from the growth we have already had. what exactly do you think regulators might start looking at? -- at in what is still a fairly standard industry in europe. sean: i think in europe, guidance around etfs in 2012, if you look at the work program, they are going to take a second look at that guidance. what they are looking at is if you look at the etf growth trajectory, ensuring the regulatory framework is best suited for the industry. quite honestly, the industry would welcome this review. it is not as much about hampering growth, if you will, it is more about making sure that the regulations are tailored to the specificities of the etf product. nejra: and how should that said -- the active management look at that is that positive? ? sean: i think it is fairly viewed as positive. active managers are eager to see how they can leverage the etf
structure to create products for themselves and their clients. so, i think certainly, a review of the etf structures and framework would allow active managers to work with regulators on how active strategies can fit within an etf construct. nejra: now, for the buy side as well, on the regulatory front, there is a lot to look at. let's talk a little bit about the fiduciary duty. we talked earlier in the show raisingis in -- insurers to etf's. but moving away from etfs, some parts of the fiduciary rule took effect in june of this year. other parts postponed until july 2019. it is seen as having the biggest impact on brokers and insurance agents. but more broadly, will it be a big blow to active management and a boost for passive? sean: it will be a headwind for active managers. the concern is that with the fiduciary rule comes a shift from a commission-based model to a fee-based model. on the broker side, the concern is that it will lead to using
cheaper, low-cost index products over active products. so, i think it creates another headwind on the active management side, which is what -- why they are sort of pursuing relators to open up the rules on etf's to allow them to package their products in a different way. nejra: interesting. derivatives rule is something else to be aware of. companies that use derivatives to hedge risk. on this front, does it look like the regulatory burdens will be eased? sean: it is interesting. the fcc a few years ago introduced mr. rid of his -- introduced this derivatives rule, which was really designed to address the embedded leverage within u.s. mutual funds. and the rule received a chilly reception from the industry and it has been on hold since then. with the change in leadership it remains to be seen if that rule will ever be progressed. if it is, it will probably be tweaked quite considerably from its original format to meet some of the concerns that it was
overly prescriptive and would restrict hedging, for example. nejra: and are there any other reforms in europe, in particular, in the asset management industry that the buy side needs to get their head around, and how far along are they from doing that? sean: the one big item out there in europe for asset managers, closely tied to brexit, is this review of the rules around delegation of asset management for european mutual funds under "the use of framework." there is this issue where many of the functions are delegated back to london, new york, or hong kong, and there are some regulars in europe that are a little unsatisfied with that arrangement. there is a push to review that and see if you need to have stricter rules around delegation. and that could have a substantial impact on sort of global asset management, but in particular, in europe and london. nejra: sean, with all this regulation on the cards other than mifid ii, what does the buy side look like after it has absorbed and implemented all of this regulation?
sean: that is a good question. i think that once we get through mifid ii and it is digested, the ultimate look of the asset management industry is it will be more transparent than it was before. it is probably going to see pressure on fees that it hasn't seen before. and i think there will be more competition around for investors, and i think that will ultimately be a good thing. nejra: sean, thank you so much. head of market and regulatory intelligence, great to have you on the program. now coming up, we talk cryptocurrencies, and bitcoin soars above $5,000 for the first time, but how will regulators get back the market? we get the latest from washington. this is bloomberg. ♪
♪ nejra: welcome back to "bloomberg markets: rules & returns." i'm nejra cehic. at bloomberg's european headquarters. there are two side to do introducing new regulation. that is according to terry duffy. on the one hand, regulation builds credibility and confidence in the marketplace. when the rules are not clear it creates uncertainty for market participants. bloomberg news' editor in chief, spoke with him in chicago. we asked him what changes he
would make to u.s. regulations. >> what i think is good for the market is to make sure you don't limit participants to the marketplace. i think liquidity is critically important. when you limit participation, especially in times of stress, when things are like they are right now where we have not much going on, you get into times of stress, you want everyone in the marketplace. >> particular bits of dodd-frank. >> it would go to the volcker act. the way it was written, it was ill advised at best. i did not support that. i believe that the banks should be allowed to prop trade. i think there was nothing wrong with it as long as they are regulated like everybody else. there liquidity is critically important to the marketplace. also for the security of the marketplace. i did not like to see them taken out of certain asset classes. so, they can prop trade. here is a great example you can , prop trade in u.s. treasuries on the cash side, but you cannot prop trade on the futures side of u.s. treasuries.
someone would say, that is no good. terry: we went from 47% of the u.s. treasury trade in the unites states at cme and now we are 87% of the trade on the u.s. treasury market. so, when you look at counterparts in europe, they are at 400% of the trade. so, we are really starting to move forward in that direction. and i'm not sure if that is because of the laws or the efficiencies in the pools of liquidity, but my point is, we should not have the banks eliminated from those pools of liquidity because even though we are not moving a lot right now because of the volatility, , stress will come into the marketplace and you want those people in there. nejra: let's talk bitcoin now. it's spiked above $5,000 for the first time. however, the ceo of ubs has said the world's wealthiest individuals are staying on the sidelines when it comes to cryptocurrencies. sergio made the comments in an exclusive interview with bloomberg. sergio: people are more curious then really willing to invest.
i don't think there is any meaningful desire for high net worth individuals to take big bets on this phenomenon. nejra: let's keep the conversation on cryptocurrencies, and how regulators in the u.s. are and aren't keeping up with the new technological advances. nathan dean, a government analyst for bloomberg intelligence, joins us now. he is in washington d.c. nathan, great to see you. thanks for joining us. as we just heard, bitcoin has surged to record after record, china central bank has stepped up regulations on digital currencies. but i am wondering how u.s. regulators are looking at cryptocurrencies and also block chain now. still unregulated? are they an asset class, apart from the financial system? give us the lay of the land. nathan: so bitcoin and block chain are mostly unregulated. what the regulars are doing is using existing regulations and laws to deal with it. if you are the fcc for example,
which is what we saw with the initial coin offerings, groups trying to raise funds and they are offering coins in exchange, the sec is saying, that is a security so we will put it under securities law. the commodity lists trading commission, bitcoin futures, same thing. that will go under derivatives. they don't have regulations for this. they are taking a look and saying, let's use existing law. certainly on the enforcement peace, if they see something they think is bad behavior, they will deal with it and deal with it swiftly. nejra: and, nathan, when it comes to bitcoin, the fcc is in a catch-22? nathan: exactly. it is moving so rapidly and so many people are adopting this. we just saw it hit a recent high. and so, the fcc, they don't really know, they don't have the resources to deal with it. so, on one hand, they want to spur innovation and growth. but i think they are going to come back to the core mission of protecting the retail investor. certainly, this will be the case
at the fcc. next year, you will see a lot of education. you might see a few enforcement actions. i mean, both regulators have been shown that they are willing to come in and stop something. but, it is just going to take a lot of time. for a brief example the cftc, , they announced that they have , earlier this year allowed one , group to be a derivative clearing organization for bitcoin. it took that organization two years to educate them. nejra: and, nathan, when it comes to block chain technology, what is the regulatory outlook? does block chain become a financial market utility? what does it mean for banks? nathan: the federal reserve and the occ, which are the provincial regular is in the allied states will look at block chain and it will fall under their payment systems methodologies. so again, they will use existing regulations. the thing with the federal reserve and the occ when it specifically comes to blocking,
-- block chain is i don't think you will be separated out, i think you will see the examination authorities of both regulars -- regulators saying, we want to make sure this is ok. it is also a function of how big does it get? a lot of people out there saying they want to build lock chain, but if you start building a system or leisure for example that is handling $5 billion in payments, that is when the federal reserve and occ is going to step in. if it is a small ledger, they will be ok with it. once it starts getting larger, that is when the examiners are going to go in and say, let's take a look. nejra: nathan, i want to turn briefly as well to the treasury report, a separate issue. one thing that seems to have got wall street aflutter somewhat are the mortgage provisions. nathan: that's right. the treasury report, this is the second of four. this deals with capital markets. there is a piece in there about securitization, specifically talking about the risk-retention rule. this is important because there wasn't a lot of chatter in washington to actually deal with this rule. you hear about it on wall
street, not so much here in washington. but the treasury report suggests is that the regulators should go back and take a look at the risk-retention rule. this requires a bs 5% on their sponsors to retain books. it is a big deal. that is about $12 billion to $16 billion in additional capital. not all of that will get changed, but one specific portion of the report we think is something that is fairly likely to happen is carve out you might see a for loan obligations. they have a different story to tell than they do on the cdo side. so, it would not be surprising to see the federal reserve take a look at this later this year. i'm sorry, next year. nejra: we will keep an eye on this from the fed's perspective. thank you so much, nathan. and that is it for this edition of " bloomberg markets: rules & returns." if you have any questions comments, or thoughts on , regulation, you can drop us in
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♪ yousef: middle east mission, u.s. secretary of state arrives in saudi arabia to begin a tour of the region. that includes iraq, syria and iran. catalonia crisis. the prime minister said he will dismiss the regional president and his government. that an attack on democracy and thousand to fightt on. stay with geopolitics in japan's snap election. we